UPDATE 1-Peer-to-peer lenders welcome step towards regulation

LONDON, Dec 7 The peer-to-peer lending industry
has welcomed a commitment by the British government to regulate
the internet-based financiers, describing it as a "watershed
moment".

So-called crowdfunding providers and peer-to-peer lenders,
which help businesses and individuals to raise cash from members
of the public, had said that rules tailored to more traditional
markets were holding back development of a vital source of
finance.

But from April 2014 peer-to-peer lenders, such as Zopa and
Funding Circle, will be regulated by the new Financial Conduct
Authority (FCA) and consultation will begin early next year to
decide how the new rules will work, the Treasury reiterated on
Friday after an announcement in parliament last month.

"We have always strongly believed that introducing
proportionate regulation was necessary to enable the sector to
continue to flourish," the Peer-to-Peer Finance Association
said.

"We are committed to working closely with the government and
the Financial Conduct Authority over the coming months to build
the right framework for our future."

The crowdfunding industry has developed in response to
reduced bank lending to small and medium-sized businesses
because of tougher capital rules and greater regulatory
scrutiny.

ALTERNATIVE MODELS

A host of alternative financing models have cropped up
online, many allowing individuals to lend to, or invest in,
companies with sums from as little as 10 pounds ($16).
Massolution, a research and advisory firm specialising in the
sector, says that 1.2 billion euros ($1.6 billion) was raised
globally from crowdfunding last year.

Though some websites have tried to fit their operations
within existing regulation, most remain largely outside it.

Part of the problem in drawing up appropriate regulation is
the wide range of activities involved. Some offer debt, some
equity, while others seek donations for charity or funding for
creative projects in return for some non-financial reward.

With little or no expected returns from the latter, the main
focus on the need for regulation has been around equity
crowdfunding and peer-to-peer lending.

The government, keen to improve the flow of finance to small
businesses to boost the sluggish economy, has also set up a
working group to look at all aspects of policy on such websites.

As well as making sure that individuals are aware of the
inherent risk involved with putting money in start-ups, the
industry wants to ensure that platforms vet businesses
adequately to avoid scams.

"Regulation is on its way," Susan Kramer, a Liberal Democrat
member of the British parliament's upper house, said at an
industry summit on Friday. "It is not a question of 'will there
be regulation?', it is a question of 'will it be the right
regulation?'"

LOST IN THE CROWD

Britain's Financial Services Authority (FSA) warned in
August that inexperienced investors should be aware of the risks
when using crowdfunding websites. A few days later United States
securities regulators put crowdfunding at the top of their
annual investment scams list.

At the moment, the FSA considers authorisation of equity
crowdfunding schemes case by case, it said.

Views differ about how to tackle these risks without
stifling an increasingly important source of funding, and the
matter is complicated by the varying rules already in place in
different countries across Europe.

Measures taken by Seedrs, the only crowdfunding website to
have received FSA approval, include the requirement for
investors to pass a test to show that they understand the risks.

"It is hard to come up with a whole securities regulation;
sometimes it does have to be a bit incremental and adaptive,"
Seedrs founder Jeff Lynn said. "There is no question at all that
this is going to be a space that will continue to move."

Some would like the operation of such platforms to be a
distinct regulated activity, but others argue for smaller steps,
such as a cap on the sums that people can invest or lend.

Though the introduction of a separate regulated activity
could still be some way off, lawyer and co-founder of
peer-to-peer site Zopa, Simon Deane-Johns, said that increased
engagement with government and regulators was encouraging.

"Over the next year or two it should become progressively
easier to set up a platform," he said.

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